Once you have obtained your finance and found a suitable property, you can make an offer to purchase the property. Once you and the vendor have agreed on a price, you must sign a contract of sale. After an offer to purchase has been accepted, contracts may be exchanged with the real estate agent.

What is an Exchange of Contracts?

A property is considered sold when contracts are exchanged and the deposit paid (normally 10% of the purchase price). Contracts are exchanged when two identical contracts are signed by each of the purchaser and the vendor and are then dated. The purchaser retains the version of the contracts signed by the vendor and vice versa.

When the contracts are exchanged, a contractual relationship comes into effect. Up to that point, the agreement is not legally binding on the purchaser or the vendor and either can change their mind about buying or selling the property.

What is a Cooling Off Period?

The Conveyancing Act 1919 provides that a purchaser of a residential property is entitled to a 5 business day cooling off period.

Vendors often insist on receiving a section 66W certificate at the time of exchange. That means the purchaser waives their right to a cooling off period and cannot back out of the contract without forfeiting the 10% deposit.

If a property was purchased at auction or on the same day as an auction after the property was passed in, the purchaser has no cooling off rights.

The cooling-off period may be reduced or extended by written agreement with the vendor. If you wish to extend you must give the vendor a written request and ensure you have a reply in writing before 5pm on the fifth business day after the exchange date. If you do not have the vendor’s written reply agreeing to an extension by then, the cooling off period will be deemed to have expired at that time and you will be bound to the terms of the contract.

If you decide not to proceed, you must give the vendor written notice of your decision during the cooling off period. In that event, you must forfeit 0.25% of the purchase price to the vendor, with the balance of the 10% deposit paid on exchange being returned to you.

Why should a cooling off period be a condition of my offer?

Reasons why it is in the purchaser’s best interests to have a cooling off period at exchange of contracts include:

1. The property comes off the market upon the exchange. Even if another prospective purchaser offers more money to the vendor, the vendor is unable to accept that offer;
2. The purchaser has extra time to secure finance for the purchase without competition from other purchasers. If the purchaser has conditional approval before exchange, the bank/incoming mortgagee should be able to issue unconditional loan approval during the colling off period;
3. The purchaser has 5 business days to consider any pest, building or strata inspection reports they order without fear of another purchaser securing the property. If a problem is uncovered, the purchaser can get out of the contract, forfeiting only 0.25% of the purchase price;
4. A cooling off period allows a purchaser to secure a property risking only 0.25% of the purchase price; and
5. If the bank does not issue unconditional loan approval during the cooling off period, the vendor may allow at least a small extension to the cooling off period to allow the purchaser a little more time to deal with the bank. However, a vendor can deny the request for an extension, which forces the purchaser to decide whether to proceed with the purchase without final approval of the loan.

Best practice is for a prospective purchaser to obtain a pre-approval from the incoming mortgagee before even starting to inspect properties.

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